Economics with a Broader View

245 (30 December 2015)

Welcome to week 245! The articles below caught my attention this week. Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********). The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by an Internet title search.

********Here it is the end of the year and earlier today JSTOR Daily sent out its top stories of the year. This one, by Livia Gershon, I missed. According to Gershon, “it seems like a few basic building blocks of meaning are the ability to use skills we can be proud of, pay and working conditions that feel halfway fair, and work that is useful—or at least not actively immoral. If these aren’t part of a job, the employer is likely to be hard-pressed to bring meaning to the workplace.” A 2009 article from Administrative Science Quarterly, “The Call of the Wild: Zookeepers, Callings, and the Double-Edged Sword of Deeply Meaningful Work” underpins Gershon’s post. Regarding the double-edged sword, its authors note that “Zookeepers sometimes care so much about their job that they accept being exploited.” All this brings to mind the economic concept of the reservation wage, i.e., “the lowest wage rate at which a worker would be willing to accept a particular type of job” (https://en.wikipedia.org/wiki/Reservation_wage). Presumably, people who derive great meaning from a particular occupation would be willing to work at a lower wage rate than someone who derives little. It is here that the notion of exploitation becomes more nuanced.

——–“Change has finally arrived in an industry that has altered little in India for almost 200 years, since the British brought Chinese tea plants to the country to gain influence over global trade. The sweet and milky tea concoction called chai is getting an image makeover at home as disruptors seeks to tap the huge potential of the export market.”

********This is not so much an article but a 20-photo essay with captions. Still there is enough to suggest that the economic forces that resulted in change in U.S. coffee consumption—think Starbucks—seem to resulting in change in Indian tea consumption.

——–“The price of oil keeps dropping. But that didn’t stop a work crew from drilling a well recently [near Berthoud, Colorado] on what was once a cornfield . . . Their well, one of hundred drilled by Anadarko Petroleum in eastern Colorado’s Wattenberg field this year, could someday gush as many as 800 barrels of crude oil a day. But Anadarko is not planning to produce a drop of crude from the well for at least another year because the price of oil is now so pitifully low. The well here is just one of more than 4,000 drilled oil and natural gas wells across the country producing nothing, but ready to be tapped quickly.” Such wells are “known in the oil business as D.U.C.s (an acronym for drilled buy uncomplete” and constitute “aa bet on higher oil prices than the current level of about $38 a barrel, which is about 60 percent lower than in summer 2014.” According to Bill Thomas, the CEO of EOG Resources, deferred completions “substantially increase the rate of return” on oil production.

********The article provides a glimpse at the stages of shale oil production and the costs associated with each. Evidently different crews with different skills and compensation are used to drill wells and to frack them, and drilling crews tend to be more expensive to hire and have more restrictive contracts than fracking crews. Consequently, the relative compensation of crews is one factor to consider when deciding to drill a well and to complete it. This article, by providing additional insight into the oil production process, makes me wonder, “What price(s) must shale oil producers see or anticipate in order to bring the D.U.C.s into production?”

——–Grand Forks Air Force Base is 80 miles north of Fargo, North Dakota, once a Cold War installation, “has been an all-drone base since 2013. . . . Where B-52 bombers stood ready with nuclear bombs in the Cold War, the country’s first commercial unmanned aerial vehicle industrial park is under construction.” Contributing to the concentration of drone manufacturing capability is the nearby “University of North Dakota, which . . . has 200 students learning to fly drones in a four-year program that started in 2009; 61 students have graduated from it. North Dakota State University, in Fargo, has also started teaching drone courses.” Some think that “North Dakota can take unmanned aerial vehicles, as the officials prefer to call drones, from a fast-growing hobby to an industry. And just as Silicon Valley got its start with military contracts, entrepreneurs and cooperative universities, the believe they can do the same with drones.” State government “has spent about $34 million fostering the state’s unmanned aerial vehicle business.”

********This definitely seems like an instance of building upon the clear strength of relevant local human capital as embodied in military installations and universities. I am reminded of the expression university military industrial complex (UMIC) inspired by president Eisenhower’s farewell address. In this case, the military and the university provided the basis for industrial development.

********In a subsequent article, “Air Force Looks Beyond Officers to Boost Drone-Pilot Ranks” [SR](http://www.wsj.com/articles/air-force-looks-beyond-officers-to-boost-drone-pilot-ranks-1451257323), it is reported that “Enlisted personnel will be allowed to operate RQ-4 Global Hawk, possibly other platforms in the future.” Such drones provide intelligence, surveillance and reconnaissance (ISR) and the demand for such services has increased dramatically in recent years. Presumably, some of the training that enlisted personnel receive will be similar to that being provided by universities in North Dakota.

——–“General Motors Co. is facing calls to add air bags as standard equipment on its popular compact cars in Mexico, reflecting broader pressure on big auto makers to include basic safety equipment in their vehicles even when governments don’t require it. Four American consumer-advocacy groups, including Consumer Reports and Public Citizen, have sent a letter to GM Chief Executive Mary Barra calling on the company to make air bags a standard feature globally. . . . Pressure to make air bags standard isn’t limited to GM or the Mexican market. Many companies, including Nissan, have been criticized for not offering air bags in India, where safety regulations are lacking.”

********I wasn’t aware, but I am not surprised, that companies like GM provide different sets of safety features for the “same” care in different countries. It is easy to understand the reasoning, though, which is that the additional costs that GM would bear by providing those features would not be made up by the additional revenues that GM would receive by providing them. Presumably, there would be a loss incurred by providing those features. All this suggests that there is an implicit trade-off between profits and lives, and it would be interesting to see what it is. This is a general issue and not one that is restricted to automobiles.

——–[This is the A-Hed, quirky article.] “Yoga, Zumba and CrossFit weren’t enough to calm us down. Angry Birds and Candy Crush Saga may have helped for a while, but they are part of the electronic-device world, with its upsetting emails and Facebook rants. So seeking solace in a scary world, some adults are heading back to kindergarten.” Coloring books are now the rage: “Eight of the top 20 selling books on Amazon currently are coloring books designed for adults. These books tend to be much more finely detailed than those for children. Popular topics include animals, fish, flowers and mandala spiritual symbols.” The coloring fad has resulted in “a spike in demand for colored pencils” that has led to sales three-to-four times higher for one retailer, who gets her pencils from a supplier in Taiwan. Some publishers are wondering “What’s next?” Little, Brown & Co. “thinks it has the answer. In January, it plans to bring out the first two books in a series of connect-the-dot titles for grown-ups.”

********An interesting and fun article. I suspect that coloring books are easier to deal with than paint by numbers. Product differentiation and derived demand are two economic concepts that are illustrated, as well as the transience of the demand for some products. By suggesting connect-the-dots as a logical follow-on product, Little, Brown & Co. indicates that it has learned the lesson of product differentiation for adults based upon products for children.

——–“Slowly but surely, a four-lane highway is beginning to take shape on the sparsely populated Central Asian steppe” near Shymkent, Kazakhstan. “This small stretch of blacktop, running past potato fields, bare dun-colored rolling hills and fields of grazing cattle, is a symbol of China’s march westward, an advance into Central Asia that is steadily wresting the region from Russia’s embrace.” According to Raffaello Pantucci of the Royal United Services Institute in London, “This used to be Russia’s back yard . . . but it is increasingly coming into China’s thrall.” The road is connected to the Silk Road Economic Belt announced by Chinese President Xi Jinping in September 2013 in Kazakhstan’s “modern new capital” of Astana. The Belt is intended to “revive ancient trading routes to bring new prosperity to a long-neglected but strategically important region at the heart of the Eurasian continent.” The region’s natural resources are of particular interest to China.

********This article provides an opportunity to mention “How the East Was Won” [SR](http://www.wsj.com/articles/how-the-east-was-won-1450925530), a review of Black Dragon River: A Journey Down the Amur River at the Borderland of Empires, by Dominic Ziegler; Ziegler, is the Asia editor of The Economist. In the book Ziegler shows that “Russia’s future is bound up with that of China, and argues that despite what seems like a happy alliance today, many Russians already find the situation deeply disquieting.” The book is also reviewed by NPR at: http://www.npr.org/2015/11/22/456370910/black-dragon-river-charts-history-along-the-amur. In light of the Silk Road Economic Belt and the tensions indicated in Black Dragon River, it is clear that those who study relationships between China and Russia will have much material to consider in the future.

——–“All that anyone agrees on in the politically charged controversy over southern flounder is that new regulations that go into effect Friday will reduce the number of fish that are caught. That’s good for recreational fishing enthusiasts and conservationists, who say the flounder stock is depleted. That’s bad for commercial fishermen who have plied the flounder trade who have plied the flounder trade for generations and say that fear is unfounded. A long-postponed meeting of the state Marine Fisheries Commission in late November ended with the commercial interests losing in a split vote, resulting in new restrictions but doing nothing to calm the emotional waters.”

********The Commission voted 6-3 to impose new restrictions on southern flounder following a nine-hour meeting in which “one member of the audience was ejected and a state legislator got into a shouting match with another.” Later, a “newly appointed commissioner resigned amid threats and racist remarks that were posted online.” I found it interesting that the article has a heading Science in dispute and there is a comment about making “decisions only on science and fact, not politics,” but there is no mention in the article to the findings of flounder-related science. Such statements remind me, once more, of Merchants of Doubt (http://www.amazon.com/Merchants-Doubt-Handful-Scientists-Obscured/dp/1608193942/). In relation to the disputatiousness surrounding many issues of public policy and science, it appears that Think Tanks, Public Policy, and the Politics of Expertise (http://www.amazon.com/Think-Public-Policy-Politics-Expertise/dp/0521673941/), by Andrew Rich, has something to add.

——–Lauren Scott lives in a homeless shelter in a suburb south of Atlanta. A previous resident of Atlanta, her life circumstances changes dramatically when she became pregnant; ten years earlier a doctor told her “complications from bladder surgery . . . had rendered her infertile.” The birth of her daughter changed her from “maybe one notch above poverty” to “well below the poverty line. There was another person to support, and there was another person to support, and there was less money to stash away, and suddenly there was no way to pay for a broken-down car, then there was no easy way to get to work.” Finally, when the call center at which she worked wanted her to work the night shift and there was subsidized nighttime child care, she quit her job. Now the challenges of seeking employment while living in the suburbs where public transportation is poor and other forms of social services are few draw attention to what has changed. “A generation earlier, even people in Scott’s situation had advantages that she lacks. They tended to live in the middle of Atlanta, near the subway, and they received welfare, cash payments from the government that were available to nearly all in deep poverty, regardless of whether they had a job.”

********The article clearly illustrates how transportation, location, and legislation affect poverty and how it is experienced. The overhaul that contributed to this situation “took root in 1996 with reforms under President Bill Clinton, who had pledged to ‘transform a broken system’ and end a ‘cycle of dependence.’ In doing so, he granted governors wide latitude—as they had requested—to draw up their own welfare programs. States would receive federal block grants, but they were under no obligation to give cash handouts. Instead, they could use the money in other ways—to educate job-hunters, encourage marriage or fund child-focused government agencies.” Policy experts say “The Deep South most clearly shows the legislation’s downsides . . . governors [there] have gone the furthest in reducing the availability of welfare, making it all but disappear as an option for the poor by narrowing income requirements and erecting high job-hunting expectations.”

——–“American retirees are exercising greater control over their finances, given the decline in traditional pension plans. But the complexity of managing and investing savings poses a challenge, particularly as the U.S. population ages, resulting in a greater number of people projected to get dementia. That has opened up avenues for exploitation.” According to the Federal Trade Commission, “People 60 years and older were involved in 171,230 fraud complaints . . . in 2014, more than double the number in 2010.” To help counter such fraud, “a coalition of state securities regulators in September proposed a model state law that would require financial advisers . . . to report suspected elder financial fraud to both a state securities regulator and an adult protective-services agency.” Financial-industry tradegroups are pushing back against such a requirement.

——–“With inequality at its highest levels in nearly a century and public debate rising over whether the government should respond to it through higher taxes on the wealthy, the very richest Americans have financed a sophisticated and astonishingly effective apparatus for shielding their fortunes. Some call it the ‘income defense industry,’ consisting of a high-priced phalanx of lawyers, estate planners, lobbyists and anti-tax activists who exploit and defend a dizzying array of tax maneuvers, virtually none of them available to taxpayers of more modest means. In recent years, this apparatus has become one of the most powerful avenues of influence for wealthy Americans of all political stripes . . . Operating largely out of public view . . . the wealthy have used their influence to steadily whittle away at the government’s ability to tax them. The effect has been to create a kind of private tax system, catering to only several thousand Americans.”

********This article elicited more than 3,000 comments by 3 pm on Wednesday. As the article points out, wealthy individuals and groups of wealthy individuals are devoting substantial funds to altering the taxes they pay, both on income and their estates. This provides the occasion to mention two books that I recently read on lobbying. The first, So Damn Much Money: The Triumph of Lobbying and the Corrosion of American Government (http://www.amazon.com/Damn-Much-Money-Corrosion-Government/dp/0307385884/), by Robert G. Kaiser. This highly-readable book, by a former managing editor of The Washington Post, provides an in-depth view of the modern development of lobbying in Washington, D.C. by focusing on the career of Gerald S.J. Cassidy. The second book is The Business of America is Lobbying: How Corporations Became Politicized and Politics Became More Corporate (http://www.amazon.com/Business-America-Lobbying-Corporations-Politicized/dp/0190215518/), by Lee Drutman. This is a revision of Drutman’s doctoral (political science) dissertation and does an excellent job of summarizing the issues in the study of lobbying, drawing attention to the relevant literature, and examining alternative hypotheses on the growth of lobbying, all this without inundating the reader (with the exception of one chapter) with virtuoso displays of statistics. The basic message here is that corporate lobbying is sticky, i.e., once a large corporation begins to lobby, it tends to continue to lobby.